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How Hulu Plans to Compete With Netflix

If streaming services were cola brands Netflix (NASDAQ: NFLX) would be Coca-Cola and Hulu would be something less than Pepsi but maybe something more than Royal Crown.

Hulu announced recently that it has 6 million paying Hulu Plus members (paying $7.99 a month) while Netflix has 34.4 million at that price just in the United States, as well as another 11.8 million paying members across the world. On the surface Netflix appears to be the clear winner in the space. But Hulu has more going for it than just its subscription base.

It's not entirely fair to compare Hulu to Netflix -- the companies have different business models, but both offer digitally streaming content and both offer premium subscription services.The key difference is that Hulu has a free, ad-supported side of its business in addition to its Hulu Plus premium service and that's an area where the company has done quite well ... even if it's not as flashy as Netflix.

Hulu wants to sell more ads

As a private company Hulu does not have to share ad sales numbers, but the information it did share at its upfront presentation (an event where television networks show off new shows) suggest that the company has done tremendously well in building an engaging platform. That platform not only appeals to consumers, it has been a draw to advertisers with over 1,650 companies placing ads on the service since 2008, according to a Hulu blog post.

"Our goal is to continue to lead the online video advertising market. Our viewers are highly engaged. On desktop alone they spend an average of nearly 50 minutes per session on Hulu and they stay on Hulu for longer stretches than any other ad-supported premium video site in comScore's top 100," Hulu CEO Mike Hopkins wrote.

That's an amazing amount of engagement, which shows that while Hulu can't match Netflix in paid members, it has built a business out of offering ad-supported full episodes of recent TV shows. Customers don't have to join Hulu to use the service.

Joining, however, offers a cleaner experience with fewer ads along with access to much more content. Free Hulu may offer an episode or two of a recent show likeThe Mindy Project while Plus subscribers get access to the entire season. Plus subscribers also get access on mobile platforms (phones and tablets) while free users are limited to desktops and notebooks.

That is about to change. This summer the company plans to offer a selection of ad-supported full TV episodes on mobile devices on its free platform. That opens up new ad opportunities as well and the company overall is adding ad-buying options including:

In-stream purchase unit: This unit will enable consumers to make an order for pick-up or delivery without ever leaving the Hulu environment. Pizza Hut will be the launch partner for this service.

Cross-platform interactive ads: The interactive experience will be expanded to mobile devices with Corona Beer as the launch partner.

Selling ads may not be as attractive a business model as selling subscriptions, but mixing the two gives Hulu flexibility and tremendous room for growth. Netflix sells no ads while subscription services like SiriusXM (NASDAQ: SIRI) have proven that it's possible to offer a premium-subscriber experience while still selling ads. Hulu serves most of its ads to non-paying customers so it does not have to be as protective of the user experience because people will put up with more ads when they are getting something they can't get anywhere else for nothing.

Hulu has original shows?

Both Hulu and Netflix offer broadcast quality original programming, though Netflix gets a lot more attention with its shows. Netflix has House of Cards, Orange Is the New Black, Arrested Development, and a few others while Hulu has some shows starring famous people that have not really cracked the public consciousness. The company plans to change that too as it plans to triple its marketing spend to grow awareness for, and interest in, Hulu Originals.

"It's not enough for us to simply invest in acquiring and producing great shows.... We want to make sure viewers know where to find them," Hopkins wrote.

None of Hulu's programs have broken out in a big way yet, but they might sweeten the pot for those considering a membership.

Hulu is a surprise success story

It's hard to judge Hulu with the company not being obligated to report revenue, but it appears Hopkins and his team have found a way to be competitive with Netflix without being drawn into "who has the bigger purse" battle over content. Because Hulu is owned by Comcast (NASDAQ: CMCSK) (which owns NBC), Walt Disney (NYSE: DIS) (which owns ABC), and Fox (Nasdaq: FOX), it's likely the service should be able to maintain its deal for recent episodes of shows from those networks without having to battle with Netflix or Amazon (NASDAQ: AMZN) . Those network relationships also give Hulu access to talent (like Seth Meyers) and it's certainly possible that a buzzy show or even a hit could draw in significantly more eyeballs, adding to the ad inventory and maybe the subscriber base.

This is good news for a company that has seemed adrift for much of its existence and was shopped for sale twice. Hulu has built an interesting and adaptable revenue model that should grow as advertisers shift more money online. Having a nearly 50-minute engagement time is stunning. And while the brand may never have the same sizzle as Netflix, it seems well on its way to being established as an alternative that could see huge leaps in its subscriber base if TV users drop cable subscriptions but want timely access to recent shows.

Your cable company is scared, but you can get richWith so many alternate ways to consume content, you know cable as we know it is going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Netflix, Sirius XM Radio, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.
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